Tech Stocks Plunge as Markets Stumble. Happy 2016!

The floor of the New York Stock Exchange (NYSE) on January 4, 2016. Michael Nagle/Bloomberg/Getty Images

It’s the first day of trading in 2016, and stock markets around the globe decided to celebrate by taking a plunge. Shares in some of the world’s winningest tech companies, from Alphabet and Amazon to Facebook and Netflix, followed suit, proving the industry isn’t immune to global pressures.

But any softening in tech shares could mean bigger problems for the market as a whole. Last year, strong tech stocks like Amazon and Alphabet compensated for stragglers to shore up the S&P 500 index, which finished relatively flat, says Michael O’Rourke, chief market strategist at Jones Trading. Even if today’s selloff doesn’t portend disaster for tech stocks in 2016, this year may not be as bright as the last. The question is how buoyant the tech sector can remain if the global economy as a whole drags.

‘Less Optimistic’

Analysts are cautious about predicting how bad an omen today’s selloff really is.

“The fact is it’s the first day, and it’s hard to predict the future,” O’Rourke says. “But, throughout the past few years, if you think about how each year started compared to this one, the prospects for this year are less optimistic than most.” (The Dow today had the worst start to the year since 2008.)

Reasons for pessimism include an already weaker market in the second half of last year, sluggish earnings, and pressure from a global growth slowdown, he says. “People clean their books out now. They prepare for what could be a less optimistic environment going forward.”

And that flagging optimism may, for good reason, extend to tech. For one, investors may be worried that overvalued tech startups could subject markets to more less-than-stellar IPOs, says New York University business school professor Roy Smith.

But concerns are also understandably broader. The tech sector is more tightly enmeshed in the economy as a whole than ever before, which means its future is subject to the same forces that afflict everyone else.

“A number of these tech companies are dependent on sales to China,” explains John Lonski, the chief capitals markets economist at Moody’s Analytics. “Look at overseas markets—not only China—but we are looking at deep declines in Europe, Japan, and other emerging markets.”

Facebook Too

Even Facebook, which may seem less at risk since it doesn’t sell goods like, say, Amazon, is affected by global trends. “Facebook is dependent on ad revenue,” Lonski adds. “And its advertising revenue is highly dependent on overall economic activity that drive the sales and earnings of media companies.”

The first trading day, of course, is still just the first trading day of the year. According to a report from The Wall Street Journal, it hasn’t necessarily dictated historically how stocks finish out the year. “There’s a pretty good chance that there are a number of shares whose declines cannot be fundamentally justified—that’s likely when you see the kind of selling pressure you see today,” Lonski says.

But that’s not exactly a reason to breathe easy. “We’re starting the year with a reminder to the financial markets that there’s a great deal to worry about.”

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The Market Wants Tech Companies to Prove Their Worth

Like much of the market, tech stocks are getting slaughtered. Since the beginning of the year, investors have been selling off their shares in some of tech’s most chattered-about names as anxieties about the global economy rise.

But some companies are going to have a harder time rebounding than others.

The so-called FANG stocks—Facebook, Amazon, Netflix, and Google—have all taken their lumps in recent weeks. But chances are that, even after the S&P 500 ended the day at its lowest level since 2014, shares in these powerful, growing companies will prove resilient.

‘It’s been a bloodbath since the ball dropped on New Year’s Eve.’ Daniel Ives, FBR Capital Markets

It’s a different crop of tech stocks—the BEGgars and MisFiTS?—that’s looking pretty grim. Shares in Box, Etsy, GoPro, Match, Fitbit, Twitter, and Square were all trading below their initial public offering price today. Those companies have each struggled in their own ways in the past year, even without the added pressure of an overall market decline.

In an environment where that pressure is very real, staging a comeback in the market will be even harder for these companies. Their only chance may be to show, quickly, that their businesses can grow and thrive in an uncertain climate. Amid general uncertainty, investors seem less likely to show patience while young tech companies try to prove their worth.

“It’s been a bloodbath since the ball dropped on New Year’s Eve,” says Daniel Ives, senior analyst for technology, media, and telecom research at FBR Capital Markets. “There’s a lot of fear out there in terms of the overall growth in the consumer and enterprise tech space.”

‘One Trick Monkeys’

When it comes to tech stocks, Ives says there are real worries over what he calls “the one trick monkeys.” GoPro, which hasn’t been able to deliver on its content business, recently announced weak sales and employee layoffs. Fitbit, meanwhile, is facing stiff competition from Apple’s Watch. Twitter remains unable to significantly grow its domestic user base compared to Facebook. “The bloom’s come off the rose for a lot of these,” Ives says.

As FANG stocks soared, some of that excitement brushed off on the tech sector as a whole.

“These stocks were bid up on the wave of this excitement, and any weakness was seen as a buying opportunity in a rising market,” says Patrick Spencer, vice chairman of equities at Robert W. Baird, says.

“When the market turned south recently people became very selective … sold the losers and kept the winners,” he adds. And he says even the winners—that is, the FANGs—are being sold, too.

A Reckoning

So what could change investors’ minds? For one thing, proof that the companies are, in fact, doing well or even better than expected. “I think tech earnings will be more of a positive catalyst,” Ives says, adding that the lack of news combined with the negative atmosphere has had an “avalanche effect.”

“I expect we’ll see choppy earnings, but the bark’s worse than the bite.”

The FANG stocks, after all, won’t continue to drop forever. “Good quality growth stocks will stabilize and start to rise again,” Spencer says. “Tech stocks perform well over the long term as long as they have rising earnings—that is the key. Those that don’t will fall by the wayside and underperform.”

And those underperformers will likely mean fewer tech stocks on the market by the end of 2016. “We’re particularly watching Fitbit, GoPro, and Box as three potential clear acquisition candidates,” Ives says. “It’s a white-knuckle period for tech. Put on your seatbelt.”

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